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Old Age Security reform

Published: February 8th 2012Source: Robert L. Brown is an expert adviser
with EvidenceNetwork.ca

OAS reform
needs to be based on facts rather than alarmist
fantasy...

The
debate around raising the age of eligibility for Old
Age Security (OAS) has only just begun and already
we are up to our necks in misleading information.
Unfortunately, some commentators have decided to use
statistics the way a drunk uses a lamppost ó more
for support than illumination.

Recent examples from well-known and highly respected
commentators (who should know better) have made some
alarming claims. For example, that the percentage of
the population collecting a pension will double over
the next 20 years; or that the ratio of workers to
retirees is headed to a 2 to 1 ratio; or that the
OAS will triple in cost from $36 billion to $108
billion by 2030; and that thereís an $800 billion
underfunded liability in our Canada Pension Plan (CPP),
along with the Quebec Pension Plan (QPP)

While all of these statistics are accurate, they are
so horribly out of context as to be useless or even
harmful in pushing knowledge forward. No wonder the
public is alarmed. But letís look at the facts.

The $800 billion unfunded liability in the C/QPP is
based on evaluating these programs in the same
manner as a private sector pension plan. There is a
$800 billion promise that is not pre-funded because,
unlike General Motors or Air Canada, we do not
expect the Canadian government to go into bankruptcy
at any time. Thus, it is far more accurate to
evaluate the C/QPP on the assumptions that there
will be future contributors and future
contributions. When that is done, there is
effectively no unfunded liability in these systems.

This has been supported with every actuarial report
of the CPP since its revision in 1996. These reports
show clearly that the CPP is sustainable for the
next 75 years at the current 9.9 per cent
contribution rate. Similarly, the QPP is sustainable
for 75 years at a contribution rate of 10.8 per
cent.

It is also true that the dollar, nominal, cost of
OAS will rise from $36 billion today to $108 billion
in 2030. But in that period of time, we expect the
economy to grow. The question is not how many
dollars OAS will cost, it is whether or not that
cost is sustainable.

There are many features of the OAS program,
including the Guaranteed Income Supplement (GIS),
that limit the real rise in costs. OAS benefits are
taxable income so many of the benefit dollars paid
out go right back to Ottawa. Both OAS and GIS have
clawbacks, which mean that wealthy Canadians get
absolutely no benefits out of either program.

Further, OAS benefits rise with the Consumer Price
Index not wage growth. And it is fair to assume that
the economy and wages will grow faster than the cost
of living. On that assumption, OAS costs that are
2.3 per cent of GDP today will rise to 3.1 per cent
by 2030. And by 2050, as the baby boom dies off,
that cost will be 2.7 per cent of GDP.

Is it sustainable?

Thatís for others to decide, but we need to
understand that the rise in OAS costs will require
an additional 0.73 per cent of GDP, not a tripling
in the effective cost as the rise from $36 billion
to $108 billion given is meant to have you conclude.

Finally, should Canadian workers have to work until
age 67? Is that good public policy?

Clearly, we need to do something about the rapidly
rising dependency ratios as we head to the date
where some projections indicate that if nothing is
done there might only be two workers for each
retiree. But the reality is that the average
Canadian worker today retires at age 62, not at age
65. There is strong research that shows that if we
could induce every worker to stay in the labour
force until age 65 (not 67) that these dependency
ratio issues would evaporate.

So, working to age 67 is not necessary and may not
be good public policy.

Raising the average retirement age is good public
policy and raising the eligibility age for OAS is
worthy of public debate. But this debate should be
based on relevant and meaningful facts not
misleading impressions.

Robert L. Brown is an expert adviser with
EvidenceNetwork.ca, a fellow with the Canadian
Institute of Actuaries, former professor of
actuarial science at the University of Waterloo and
past president of the Canadian Institute of
Actuaries.